AT&T Merger With T-Mobile Shows Signs of Faltering

The companies withdrew a merger application with the F.C.C. and said AT&T would take a $4 billion charge if the deal fails. But they also said they would still pursue the $39 billion merger.

EDWARD WYATT and JENNA WORTHAM

WASHINGTON — AT&T and T-Mobile USA edged closer to scrapping their proposed merger, saying on Thursday that they had withdrawn their application to the Federal Communications Commission to join their cellular phone operations.

Deutsche Telekom, the parent of T-Mobile, and AT&T said in a joint statement that they still intended to pursue the $39 billion merger and would prepare for a federal antitrust lawsuit that is seeking to block the deal. But the companies also said that AT&T planned to take a $4 billion charge against earnings to reflect the potential breakup fees that AT&T would have to pay Deutsche Telekom if the deal failed to go through.

The actions followed the decision this week by Julius Genachowski, the F.C.C. chairman, that the merger did not meet the commission’s standard for approval. Mr. Genachowski sent other commissioners a proposed order to refer the case to an administrative law judge, the first step toward a commission move to block the deal, which would combine the second- and fourth-largest cellphone carriers in the United States.

The application withdrawal appears in part meant to prevent the F.C.C. from making public AT&T and T-Mobile records about the potential effects of the merger, records that could then be used by the Justice Department in the antitrust trial.

The companies have maintained publicly that the deal would not lessen competition and that it would create jobs in the United States. But the Justice Department has said that the merger would severely restrict competition, and F.C.C. officials have said that AT&T’s confidential filings indicate the merger would eliminate jobs.

The withdrawal of the F.C.C. application “is a tacit acknowledgment by AT&T that this story is all but over,” said Craig Moffett, an analyst at Sanford C. Bernstein. “The fat lady hasn’t started singing yet, but she’s holding the mike and the band is about to play.”

The efforts by the Justice Department’s antitrust division and the F.C.C. to block the merger reflect a reinvigoration of federal efforts to rein in excessive business practices after a prolonged period of deregulation that preceded the 2008 financial crisis.

President Obama came into office pledging to take a harder look at the antitrust implications of proposed mergers, but the Justice Department was criticized by consumer groups in its first year for appearing hesitant to follow through on that promise.

Similarly, the F.C.C. drew rebukes for its approval last year of the merger between Comcast and NBC Universal, which critics claimed would concentrate too much power over both television content and its transmission to consumers.

The move this week to conduct a hearing on the cellphone deal was the first time the F.C.C. had done so on a merger since the 2002 proposed alliance between Echostar and Direct TV, which ultimately was scrapped.

In the current case, however, AT&T has noted that expansion of the nation’s Internet infrastructure is one of Mr. Obama’s top goals to help rebuild the economy, and the F.C.C. itself has predicted that its recent initiative to expand broadband Internet access to rural areas would create hundreds of thousands of jobs.

Consumer groups, which generally have opposed the merger, said this week’s combined actions indicated that the deal was falling apart.

“The chances that AT&T will take over T-Mobile are almost gone,” Gigi B. Sohn, president of the consumer group Public Knowledge, said in a statement. “While you can never count out AT&T entirely, the fact that they pulled their F.C.C. application speaks volumes about the company’s lack of confidence” in getting approval.

Deutsche Telekom, based in Germany, said in a statement that the withdrawal “is being undertaken by both companies to consolidate their strength and to focus their continuing efforts on obtaining antitrust clearance for the transaction from the Department of Justice. As soon as practical, Deutsche Telekom and AT&T intend to seek necessary F.C.C. approval.”

AT&T issued its own statement saying that the companies were taking this step “to facilitate the consideration of all options at the F.C.C.,” as well as to consider other options.

The company said the $4 billion pretax charge, to be taken in the current quarter, reflects a $3 billion cash payment and $1 billion worth of cellular airwaves, or spectrum, that AT&T must pay to T-Mobile’s parent if the merger does not receive regulatory approval.

Tammy Sun, an F.C.C. spokeswoman, confirmed that the commission had received the AT&T and T-Mobile request to withdraw the application.

The commission is not obligated to grant the request, however. It could deny it, going ahead with its consideration and judicial hearing, or it could grant the request with prejudice, meaning that AT&T could not later refile the application. That would essentially kill the deal.

When AT&T agreed to buy T-Mobile USA from Deutsche Telekom in March, the deal looked like a happy ending for T-Mobile, which had been bleeding customers and battling against declining sales. The company has struggled to retain and add new customers as AT&T, Verizon and Sprint have attracted new mobile phone shoppers with popular handsets like the iPhone and the promise of faster networks and data services.

Over the last eight quarters, the mobile industry over all has added a net 33 million customers in the United States; T-Mobile has added only 89,000 of those, according to Chetan Sharma, an independent wireless analyst.

A dissolution of the merger could leave T-Mobile in a much worse position than it was prior to March, when the acquisition was first announced. Analysts say that since then, the company most likely froze any major negotiations with smartphone and tablet manufactures like Apple to avoid interfering with any deals under way between AT&T and those hardware vendors.

That could severely limit T-Mobile’s ability to lure customers from competitors over the coming quarters if the merger is abandoned. But the spectrum that T-Mobile would receive from AT&T in a breakup could help the company, perhaps making it attractive to another company or investment group looking to get into the cellular and mobile broadband business.

Deutsche Telekom has made clear that it no longer wants to be in the mobile phone business in the United States, saying it would stop investing in cellular infrastructure here to concentrate on its European operations. If the merger falls through, the German company may decide to spin off the unit as an independent entity, sell it at a less attractive price to a rival like Sprint Nextel or sell it off in pieces. Possible proceeds from the deal had been earmarked to reduce debt and buy back stock.

While there has long been talk about a possible combination of T-Mobile with Sprint, the Justice Department’s opposition to the AT&T combination would seem to indicate problems for Sprint, the No. 3 cellphone carrier. Verizon is currently the largest carrier, but the AT&T purchase of T-Mobile would have vaulted the combined entity into first place.

For AT&T, the acquisition of T-Mobile and its wireless spectrum could mean improved service and network quality, crucial for helping the carrier ramp up its rivalry with Verizon.

AT&T has been looking for ways to keep an edge over the other carriers since losing its exclusivity as the sole carrier of the iPhone in the United States earlier this year.

Analysts expected that acquiring T-Mobile would give AT&T the ability to price its plans and handsets more aggressively, since hardware makers might be willing to offer AT&T a lower rate for large volume purchases of new smartphones and tablet computers.

Even if AT&T wins its case with the Justice Department, it must receive F.C.C. approval to be able to take over T-Mobile’s licenses to operate its network on the public airwaves.

The decision by the F.C.C. to request a judicial hearing on the merger had already caused Christopher C. King, a telecommunications analyst at Stifel Nicolaus, to put the probability of the deal being completed as low as 10 to 20 percent.

“At some point,” Mr. King said, “AT&T is going to have to face the reality that this deal is pretty much dead.”

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